Are you better off buying or leasing business equipment? Of course, the answer depends on a number of factors. But there are several valid reasons that may favor leasing over buying.
Background: Generally, your company will use a "fair-market value" lease, or a true lease, when it leases equipment. This gives you the option to return the equipment at the end of the term at no further obligation. If you decide you want to continue using the equipment, you can renew the lease or buy the equipment at the going price.
With such a lease, you can fully deduct your annual payments. That's usually preferable to buying equipment, which generally results in multiyear depreciation deductions. For example, a three-year lease can provide more tax benefits than an acquisition that must be depreciated over a period of five or seven years.
Furthermore, the alternative minimum tax (AMT) may limit depreciation deductions for equipment purchases. In contrast, the AMT doesn't reduce equipment-leasing deductions. So, if your company cannot take full advantage of the tax benefits of equipment ownership, leasing may be a better tax choice.
Here's a brief review of some common non-tax benefits for leasing equipment.
1. Leasing often requires a lower upfront cash expenditure when compared with the down payment required for equipment you buy. Thus, your company may have more cash available for other purposes.
2. When you buy equipment, you run the risk that it will become obsolete before the end of its useful life, leaving you with valueless hardware. Conversely, leasing lets you decide among various options at the end of the deal: renew the lease, buy the equipment or walk away. Regular replacement with new equipment can reduce repairs and maintenance costs.
3. If your company expects to use equipment only for a short period of time, you are better off with a lease. Buying such equipment makes you responsible for resale to recoup the remaining value of your investment.
4. As a practical matter, certain types of equipment may be more available at a reasonable price from leasing companies than from vendors. Leasing may also speed up the acquisition process.
5. Finally, certain types of equipment obtained via a lease may not have to appear on your company's balance sheet. This, in turn, can help your overall financial picture.
When you add all these factors together, it generally doesn't pay to buy assets that are likely to become outdated soon. Leasing can put equipment into your company's hands with the least amount of financial strain.
Nevertheless, we're not saying that leasing is always the best option for a company. Buying equipment, rather than leasing it, may be preferable for your situation. We would be glad to analyze these factors for you.
